Study Notes on Banking, Federal Reserve, and Economic Principles

Banking System and Money Supply

  • Lending Practices
    • Banks can lend out a significant portion of deposits. In the example provided, they can lend out 90% of the deposits.
    • Important concepts in this context:
    • Excess Reserves vs. Required Reserves.
    • Loanable Funds: Refers to funds that are available for lending.
    • Money Creation: The process of creating money within the banking system, which is distinct from money that is physically printed by the U.S. Mint.

Role of the Federal Reserve

  • Federal Reserve's Function
    • The Federal Reserve (often referred to as the Fed) is responsible for managing the money supply in the U.S. economy.
    • When the economy is slowing down, the Fed may increase the money supply to stimulate growth, which is aimed to appease political pressures, such as those from President Trump.
    • This is done by lowering the interest rate (denoted as little r) that banks pay, encouraging lending.

Economic Recovery and Job Creation

  • Jobless Recovery
    • A phenomenon where the economy grows but does not create jobs, often due to advances in technology.
    • Mention of the Great Depression referencing President Roosevelt's actions during that time.

Keynesian Economics

  • Discussion on the Keynesian Range
    • Flat nature of the Keynesian Curve: Arises due to unions advocating for higher wages and benefits.
    • LIFO Principle: Last In, First Out, referring to how companies lay off employees starting with the lowest-paid positions, which can raise the average wage of remaining employees.
    • Phillips Curve relevance in normal times: Economic theory that describes an inverse relationship between inflation and unemployment, valid under typical economic conditions.

Aggregate Demand Shift and Outcomes

  • Transition from c to d in aggregate demand: Outlined as a process with four outcomes that students must understand for exams.
    • Positive Outcomes:
    1. Increased production.
    2. Job creation.
    3. Rising income for Americans.
    • Negative Outcome:
    1. Inflation increases as production ramps up; leading to a new floor in prices, described as the Ratchet Effect (prices can increase but not decrease easily).

Fiscal and Monetary Policy

  • Current events as examples of economic principles
    • Discussion on fiscal policy, with tax cuts impacting consumer finances stated to be effective by April 15.
    • Influence of major corporate salaries (e.g., Jeff Bezos) on stock prices and employment opportunities.

Corporate Borrowing Practices

  • Corporations borrowing from big banks
    • Large corporations frequently take out substantial loans from banks for expansion and capital projects. For instance, Exxon may borrow a million dollars for factory development.
    • This can involve borrowing from the Federal Reserve if banks lack enough capital to meet these lending demands.
    • Interest rates on loans depend on market conditions; businesses may receive lower rates compared to consumer loans because of their scale.

Real Estate Market and Interest Rates

  • Example of purchasing a home
    • A discussion about the practicalities of home buying, referencing a $100,000 down payment for a $400,000 house.
    • Highlighting the mortgage loan aspect: Borrowers often require an additional $300,000 from banks.
    • Interest rates impact affordability significantly; even a slight increase in rates during a mortgage application process can exclude potential buyers from the housing market (e.g., a 0.5% rise on a $300,000 loan over 30 years).

Conclusion & Student Engagement

  • Inviting questions and encouraging clarification on concepts
    • Emphasis on understanding various monetary policies and their practical outcomes on individual finances and broader economic conditions.
    • Awareness of interconnectedness within the economic framework and its implications on students' futures and market choices.